Companies caught short by spending plunge

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Profit warnings hit a record level in the first six months of
this year, coming in at twice the normal average, but the outlook
is expected to be more stable between now and Christmas as
investors brace themselves for the reporting season.

The plunge in consumer spending contributed to the 155 warnings,
which, according to Ernst & Young's Profit Watch report, came
in at more than two-and-a-half times greater than for the same
period in 2004.

This figure also represented the highest number of warnings
since the firm started monitoring announcements to the Australian
Stock Exchange in 1999.

Reduced consumer spending was the most common reason cited for
profit warning announcements (23 per cent), ahead of increased
operating costs and overheads (15 per cent), restructuring costs
(12 per cent) and more competition (8 per cent).

Share prices dropped by an average 9.4 per cent on the day of
the warning, with the average blowing out to 13 per cent seven days
after the warning was issued.

Ernst & Young partner John Georgakis said consumer
discretionary stocks, including clothing retailers, wine stocks,
whitegoods, appliance distributors and general merchandisers,
recorded the greatest number of warnings.

The construction, financial, travel and airline industries also
issued warnings.

"It appears that some retailers have failed to plan for the
inevitable dampening in consumer confidence and are being forced to
revise their earnings expectations in light of softening trading
conditions," Mr Georgakis said.

But he said the high number of warnings indicated companies were
lulled into over-optimism because of strong growth.

"Companies projected good growth and they might not have
anticipated the softer markets," Mr Georgakis said. "The interest
rate hike in March probably spooked people and there's been a
softening in the property market. It's been a volatile market and
companies have been optimistic in their forecasting and they could
have been a little bit more conservative."

A considerably lower number of profit warnings is expected over
the next six months. Traditionally, more warnings come between
January and June, usually with a sharp spike in February when
companies scramble to update their full-year expectations before
releasing half-yearly results. Another batch usually comes in April
and May when the bad state of affairs gets too obvious to ignore in
the lead-up to the balance date.

Mr Georgakis said he expected fewer warnings over the next six
months, compared with the same period in 2004, with the economy
still appearing to be on track.

This was despite the market facing increased risks from
terrorism, soaring oil prices, concerns about consumer confidence
and questions about the prolonged resources boom.

"Stakeholders should be mindful of these issues when
interpreting company forecasts, especially in higher risk areas
such as the transport, retail and travel industries," he said.